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The IRS consolidated four correction programs for tax qualified plans
into a single Employee Plans Compliance Resolution System (EPCRS).
Self-correction programs allow employers that sponsor tax-qualified
pension plans to correct failures or defects that otherwise might
threaten a plan's qualification.

Revenue procedure 98-12 provides a uniform set of
correction principles that clarify the use of EPCRS. It also ensures
that EPCRS is consistently administered. The new procedure has a
graduated sanction schedule that takes into account the nature, extent
and severity of the violation. The administrative programs that were
consolidated into EPCRS include

Administrative Policy Regarding Self-Correction (APRSC),
which permits a plan sponsor with established compliance practices
and procedures to correct "insignificant" operational
failures without IRS approval, or a fee, and to amend
"significant" failures within a two-year period with IRS
approval.

Voluntary Compliance Resolution (VCR), which allows a plan
sponsor prior to audit and with IRS approval (and for a limited fee)
to rectify operational defects that do not qualify for APRSC.

Walk-In Closing Agreement Program (Walk-In CAP), which enables a
sponsor to voluntarily disclose and correct qualification defects
that do not qualify under the VCR program, with the payment of a
compliance correction fee based on a new fee schedule.

Audit Closing Agreement Program (Audit CAP), which allows a plan
sponsor to negotiate the monetary sanctions for, and the methods of
correcting, plan failures discovered on examination.

Observation. The IRS has exacted hefty
monetary penalties from sponsors whose plans did not comply with the
extensive legislative and regulatory qualification rules. EPCRS brings
needed clarity to the self-correction process and provides for more
reasonable sanctions. Plan sponsors and their advisers should
familiarize themselves with the programs that fall under the EPCRS
umbrella.

The United States and Canada have
signed a treaty to tax Social Security benefits in the country
where the taxpayer resides. Formerly, taxes for these benefits
were paid directly to the country that provided them. U.S.
residents receiving Canadian Social Security payments (or vice
versa) are advised to read the new rules in IRS Advance Notice
98-23 (1998-18 IRB). For 1996 and 1997, taxpayers can remain
subject to the old rules or follow the new ones. The notice
includes the rules for amending a tax return and obtaining a
refund.

Sorry, You Have to Pay the Interest

The Ninth Circuit Court held that interest on a tax
deficiency associated with an unincorporated business is not a
deductible business expense, reversing a Tax Court decision.
The court ruled that nondeductible personal interest included
interest on tax deficiencies regardless of the source of
income generating the tax liability ( Redlark v.
Commissioner , CA 9, 4/10/98).

Testing Tours

Exempt organizations must pay federal income taxes if they
engage in activities unrelated to the organization's exempt
function. In recent years, many exempt organizations have
generated additional income by conducting tours and travel
packages. The IRS has published several examples of
"acceptable" tours. According to proposed regulation
1.513-7, the organization, to remain exempt, must ensure that
the tour be "educational" and possess "some
academic rigor." For example, a tour should include
professional instruction and exams or provide academic credit.

Profitable Refund

Because of a series of IRS blunders, a taxpayer received
an erroneous refund of over $600,000. According to the Court
of Appeals for the Federal Circuit, the IRS neither demanded
the money back nor acted in a manner prescribed by law to
recover the refund. Therefore, the court allowed the taxpayer
to keep the money ( Stanley v. Commissioner ,
CA-FC, 4/2/98).

The Tax Reform Act of 1997 significantly changed the taxation of the
sale of a personal residence. Under the new law, taxpayers can exclude
up to $250,000 ($500,000 on a joint return) of the gain on the sale of a
home they have used as a principal residence for two out of the last
five years. Since the law refers to use by a "taxpayer," a
question arises: Can an entity
take advantage of this exclusion?

Luciano Popa filed a petition under chapter 7 of the U.S.
Bankruptcy Code. Later, he petitioned the Bankruptcy Court asking that
the bankruptcy estate be given permission to "abandon"
Popa's residence on the grounds that he had no equity in the property.
Although the value of the house exceeded the outstanding mortgage,
Popa asserted the value would be zero if the gain resulting from a
sale were taxable. The bankruptcy trustees argued the gain from the
sale was nontaxable under the newly enacted IRC section 121 and,
therefore, the estate should not release the residence.

Result : The bankruptcy estate is entitled to
use section 121. The availability of the old section 121, which
excluded the gain on the sale of a residence by a taxpayer over age 55
to a bankruptcy estate, was previously considered in In re Mehr
and In re Barden . In both cases, the Bankruptcy
Court concluded the estate could not take advantage of section 121. In
Popa, however, the court refused to follow the prior cases for two
reasons.

The law had changed significantly. The old rule required
the taxpayer to be over age 55. The estate could not meet this
requirement. Because the new law has no age requirement, the issue
is not relevant.

The court interpreted the Bankruptcy Code differently. The act
provides that a bankruptcy estate can tack on the holding period and
character of tax items from the debtor. As a result, the court
concluded the estate would meet the use test because the debtor
himself met the test. The act also provides that the estate be taxed
as if it were an individual. Therefore, the estate is a qualifying
taxpayer.

Given the change in the law from a tax deferral provision to an
exclusion provision, it is uncertain whether the courts will follow
the prior liberal interpretation of the old law under the new law. In
this early decision, the answer appears to be yes. If other courts
follow, taxpayers have been given major tax relief on the sale of
their residence.